Put Options Explained So They Are Understandable
Definition:
An option is a contract which gives the buyer the right, but not the obligation, to buy (in the case of a call option) or sell (in the case of a put option) shares of the underlying security at a specified price (the strike price) on or before a given date (expiration day)
Application:
If you feel a stock or the NASDAQ, NYSE, AMEX etc is going to drop then you would buy put options. When and if the stock or market drops the value of the put options increase. Often the percentage the stock drops is only a fraction compared to the percentage increase in value of the option. 10% drop I market could be a 120% increase in put option contract.
Put Options as Insurance:
The put option protects against capital loss and also allows us to take bearish positions in the market without having to sell stock short (which is riskier). Like insurance, a you pay a premium and purchase a put option to protect your holdings. If market crashes, you sell the put option at an increased value to offset any losses or exercise the option and sell the stock.
Put Options Trading Strategies:
- Protective Put Strategy- used to protect an existing long stock position an investor holds from a huge price drop.
- Selling Put Options -Put option writers, also known as sellers, sell put options with the hope that they expire worthless so that they can pocket the premiums. This is riskier but profitable.
- Covered Puts – the written put option is covered if the put option writer is also short the obligated quantity of the underlying security.
- Naked Puts – the short put is naked if the put option writer did not short the quantity of the underlying security when selling the put option. Writing naked puts is employed when the investor is bullish on the stock or security.
- Put Spreads – is an options strategy in which equal number of put option contracts are bought and sold simultaneously on the same underlying security but with different strike prices and/or expiration dates. Put spreads limit the option trader’s maximum loss but also limits the potential profit.
- Married Put – is an option strategy whereby an investor, holding a long position in stock, purchases a put on the same stock to protect against a depreciation in the stock’s price.
- Buy a Put- is the simplest way to trade put options. If you believe a stock will drop shortly, buy a put and profit from drop in price.
Put options explained better in our new site
